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What is the Work Opportunity Tax Credit (WOTC) and Does Your Business Qualify?

Did you know that you could be receiving up to $9,600 in federal tax credits for your next new employee hire?  That’s right!  With some basic understanding of this underutilized federal program, you could dramatically lower your tax burden immediately.  With software automation, you can even do this without investing much time.

The Work Opportunity Tax Credit (WOTC) program is an initiative offered by the federal government to help increase the opportunities for employment amongst people that may otherwise face certain obstacles such as veterans, public assistance recipients, long-term unemployed and ex-felons. It allows for-profit businesses to claim tax credits for hiring employees that fall under one of those categories.

The program is available to any US based business and is popular in industries such as hospitality and restaurants, home healthcare, construction, and manufacturing.

Currently, there is no limit to the number of qualified employees a company can hire and claim the credit for. The WOTC is often under-utilized by most companies, as some do not even know it exists are that they qualify for it.

Categories eligible for WOTC:

  • Long-term unemployment recipients
  • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Food Stamp recipients (SNAP)
  • Ex-Felons
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients

WOTC is typically claimed on Form 5884 and is based on the wages paid to eligible workers during the first two years of employment. The credit amount total can be up to $9,600 for each qualified new hire, depending on the category they fall under.

The category also determines how long an employer can claim WOTC for and it typically lasts between a one to two-year time frame. Employers who do not take the full credit amount due to a tax liability limitation, may apply the credit retro-actively to one year or carry forward the unused credit 20 years or until the credit is used, whichever comes first.

How to determine eligibility

Determining if an employee is eligible starts at the new-hire application process. When a candidate applies for a position at your company, they can answer a few questions that will determine if they are WOTC eligible. If they are, you or your payroll service provider will need to complete the certification Form 8850 with the IRS. This needs to be completed on or before the day the applicant is offered employment and all required forms must be submitted within 28 calendar days of the employee’s start date. 

Rules and restrictions

Once the application process is complete, the employer is required to retain all records regarding each WOTC claim for five years from the date of the written certification from the Employment Development Department, (EDD).

An employer cannot request WOTC to be applied to any former employees that may have been rehired. Employees may only be certified the first time that they are hired on. WOTC may not be applied to any relative of the employer. Similarly, anyone that resides with the employer is also ineligible.

If false information is provided or pertinent information is withheld, the EDD states that an employer can face fines and or imprisonment for misrepresentation on their WOTC applications.

New hire screening for WOTC eligibility and filling out the required paperwork can be time consuming.  Therefore, many companies have not taken the time to gain expertise and take full advantage of this program.  Automating the new hire screening process can be accomplished easily with onboarding software that offers integrated WOTC screening to do most of this work for you.

Contact us to learn more about our HR and payroll solutions to complement ATS— from timekeeping systems with companion mobile app, physical clocks, and customized job costing and labor distribution reporting.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.